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[Quora]How can you explain the concept of stock market to a 7 year old?

Wow, this should be interesting.

Let’s assume seven year old Tom, a rather enterprising fellow that he is, wants to open a lemonade shop. The shop will run all through summer break( Around 60 days). Now he needs 100$ to buy the lemons, the ice, a small table and chair and a colourful canopy. But investing 100$ is kind of risky. So he goes to his classmates, and offers them a part of what he makes if they all chip in 1 $. Everyone who has chipped in the dollar gets a ticket- a share if you may.

The daily profit that Tom makes, will now be split into 100 parts, and each of his classmates will get 1/100th of the profit. The value of the ticket they hold therefore, will be equal to the the sum of these 1/100th amounts for all the subsequent days when his lemonade shop is working.(Neglecting time value of money.)

Now, if Tom makes a 20$ profit on his first day at work, each of his classmates will get 20 cents. Since his shop will be running for 60 days, they are bound to get a lot more(60*0.2=12$) than what they had invested. Now all his classmates want to buy more tickets at 1$ since they are hoping to get 12, and the value of each ticket begins to increase. Now, seeing Tom’s grand success Rita also starts a shop along the same street corner. Rita makes way better lemonades , and Tom’s profits slowly start falling. This causes a panic among the ones who have bought Tom’s ticket, wanting to sell it off while it is still high.